Series 98 – Opportunities in the Banking

We have increased our banking exposure from 4.5% to 15%, this week we are going to see why we have increased our exposure.

We all know the banking sector plays a crucial role in driving India’s economic growth by facilitating credit flow, enabling financial transactions, and ensuring monetary stability. The Reserve Bank of India (RBI), through its monetary policy, regulates liquidity, interest rates, and inflation to maintain economic equilibrium.

Current opportunities in the Banking  – India’s banking sector offers significant growth opportunities, driven by increasing credit demand, digital banking expansion, and rising financial inclusion over the past decade. The sector generates revenue primarily through net interest income (NII) from loans and deposits, along with other income from fees, forex transactions, and investment services.

A key concern is that if the RBI continues cutting the repo rate, banks’ Net Interest Margins (NIM) will decline. While lower interest rates may reduce lending margins, they can also lead to an increase in Assets Under Management (AUM), potentially offsetting the impact on Net Interest Income (NII). However, other income sources, such as fees, commissions, and treasury gains, may see an uptick.

Apart from the recent Cash Reserve Ratio (CRR) cut, the RBI is also injecting $10 billion into the banking system through a forex swap (USD/INR buy-sell) on February 28, with a 3-year tenure. This move aims to increase rupee liquidity, enhance loan securitization, and support loan growth. The impact of these liquidity measures will be crucial in determining how banks manage their loan-to-deposit ratios and fund fresh credit expansion. Additionally, the recent reduction in income tax rates is expected to boost disposable incomes, potentially driving higher consumption and credit demand. Furthermore, recent RBI adjustments to risk weight requirements for microfinance and NBFC loans may further support credit growth, reinforcing our positive stance on select private banks.

At ITUS, We remain selective in our approach, focusing on private banks with strong fundamentals. The market is currently differentiating banks based on the quality of their loan books and overall asset health. As a result, we prioritize banks that demonstrate sustainable RoA expansion, maintain a robust asset and liability franchise, and continue to improve their asset quality, as evidenced by declining Gross Non-Performing Assets (GNPA) levels in the private banking sector. Additionally, the price-to-book ratio of private banks is currently attractive, making this an opportune time to increase our exposure.

Having remained underweight in banks for the past 18 months, we now see improving fundamentals, including modest deposit growth and an expected improvement in return on assets RoA over the next few quarters.

These weekly episodes are now available in our website for your quick read and you may access the same in the below link.

Weekly Enlightenment Archives – ITUS Capital